By Sarah Cotton Patterson
Published in Arkansas Bakers Magazine
You have probably spent most of your life working on your family farm. You helped your parents, grandparents, and siblings do all the things that a family farm requires. You do not get to take vacation days, sick days or “I don’t want to work” days. If you don’t do it, who will? Who will prepare the field, harvest the crops, or feed the livestock? Who will fix the broken fence or pay the bills? So what happens if you have a sick day, or worse, you die? Who will own the property and the business? Who will get up on that day and take over the crops or the livestock and continue the life’s work you have built?
Proper succession and estate planning will provide your family with a focused and reasoned path for passing your family farm onto the next generation, allowing for the continued success and viability of the farming operation for years to come. While planning for one’s death or incapacity is never an easy task, it is of vital importance that your wishes are clearly set forth so that there is no confusion about who will inherit and control the business operation. Making the decisions now will not only preserve the farming operation for generations to come but can help maintain family harmony as well.
Succession Planning with Family Members. Clients often have an idea or plan for how the farm will operate once they are no longer involved. Some clients have one or more children who actively participate in the farming operation, and other children who do not. Proper succession planning includes a written and implemented a plan for who will run the farming operation and who will own the farming operation, which may be two different answers. In addition, proper succession planning includes making sure that your revocable trust or last will and testament is updated to work in conjunction with your succession planning. If you are leaving the land and/or the farming operation unequally to your children, you may want to compensate your other children with non-farm assets, such as cash, stocks or other property.
Succession planning may also include retirement options, such as transferring the farming operation prior to death, or continuing to own the farming operation and renting or leasing the business and/or land to a family member(s) to provide income to you and your spouse until death. Further, it includes choosing a person or persons to run the farming operation if you are incapacitated.
Proper and executed documents are essential to carrying out this plan. It is also advisable to consider sharing the plan with those who will be impacted; i.e., your children and other family members.
Succession Planning When You Own the Business with a Partner. If you own the farming operation with other individuals, whether family members or non-family partners, you should have frank discussions regarding what will happen if one of you wants to leave the farming operation, becomes incapacitated, or dies. You should have a plan for how the remaining partners will operate the farming business, and whether the remaining partners will buy out your interest or continue to partner with new owners, such as the partner’s spouse and/or children.
Buy-Sell Agreements. Buy-sell agreements are quite common in joint business ownership. Whether you are leaving your family business to multiple children or grandchildren, or you are partners with a non-family member, having a buy-sell agreement can accomplish many things. It can limit a selling partner’s ability to sell to a third party without first offering the ownership interest to the other partners or it can trigger a sale or purchase option in certain instances, such as death or incapacity. You can often fund a buy-sell agreement with life insurance on the partners, which will provide liquidity for the purchasing partner(s) to pay the purchase price in the event of a partner’s death. The buy-sell agreement can also set the payment terms in advance to allow the farming operation to remain viable. If you have multiple entities involved in the farming operation, you will to make sure all of the entities are addressed in a global buy-sell agreement.
Estate Planning Considerations. We strongly recommend that you have estate planning documents which work in conjunction with your succession planning documents. At a minimum, you should have a last will and testament, which provides for the distribution of your assets at death, and a financial power of attorney, which directs the person or persons to whom you grant the power to manage and control your assets in the event of your incapacity. More sophisticated estate planning will incorporate a revocable (or living) trust, which, when properly funded, will avoid a probate proceeding at your death and will keep the nature of your assets, their value, and their distribution private. In addition, you may need an irrevocable trust, limited liability company, or family limited partnership to address your overall estate planning goals. If you already have these documents in place, make sure that your estate planning documents are reviewed from time to time to address any changes in state and federal law, your business, your land, and your family dynamic.
Estate Tax Issues. Many people, particularly farmers, are familiar with the federal estate tax, or the so-called “Death Tax.” The recent tax bill passed by Congress provides relief from the estate tax for individuals whose estates are valued at less than approximately $11.2 million, or if married with proper planning, $22.4 million. For estate tax purposes, an “estate” includes the value of all of your assets, including land, business, equipment, retirement accounts, life insurance and liquid investments. If you review your current assets and you are subject to the estate tax even with the increased exemption (which is scheduled to expire on December 31, 2025, and revert to the pre-2018 exemption of $5 million, as adjusted for inflation), then you will want to make sure that you include estate tax planning in your overall estate and succession planning.
“Land is the only thing in the world worth workin’ for, worth fightin’ for, worth dyin’ for because it’s the only thing that lasts.” Those who have spent their lives running a family farm often subscribe to this motto from Gone with the Wind. You have worked hard to make your family farm a success. Proper succession and estate planning will ensure the family farm is protected and safeguarded for future generations.
The information provided above is created by Attorney Sarah Cotton Patterson. Sarah is a partner with Friday, Eldredge & Clark and has practiced law for 17 years in the Trust and Estate Planning practice group. Her focus is on estate, trust and tax matters for individuals, as well as entity formation and business planning.
This is not a substitute for legal advice and should be considered for general guidance only. For more information or if you have further questions, please contact one of our Trust and Estate Planning Attorneys.